Mexico in 1994 and 1995. Thailand, Indonesia, the Philippines, Malaysia, and South Korea in 1997. Russia in 1998. Brazil in 1999. Argentina in 2001. The United States and the United Kingdom in 2007 to 2009. These are examples of recurrent crises that have recently plagued the world economy. At the time, each of these crises was described by some as unexpected, but as it turns out, there are good reasons to expect crises to occur with some regularity. Why? Unlike markets for most goods and services, financial markets are characterized by what economists term “imperfections.” Because of these imperfections, we cannot be assured of economic or allocative efficiency in markets for financial products. Furthermore, the imperfections tend to make financial markets somewhat unstable, with “booms” of one kind or another being followed by “busts.” The purpose of this chapter is to help you understand why this is so and what role it has played in crises.

We begin by considering different types of crises. These include hyperinflation, balance of payments and currency crises, asset price deflation, banking crises, external debt crises, and domestic debt crises. This is followed by a brief consideration of contagion and systemic risk. We then consider the analysis of “old-fashioned” balance of payments and currency crises. This is followed by a consideration of the more “high tech” Asian crisis and the response of the International Monetary Fund (IMF). We take up the sub-prime crisis of 2007 to 2009, and finally, we discuss two proposals for addressing crises: the Basel standards and capital controls. A third proposal, exchange rate target zones, is considered in an appendix to the chapter. Having studied this chapter, you will be in a better position to assess much of the current debate on crises in the international financial system, an issue that will be with us for some time to come.